SVB Financial's big bet on China

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SHANGHAI — Dave Jones remembers the day he volunteered, half-jokingly, to run a Chinese bank.

Greg Becker, the chief executive of SVB Financial Group, asked Jones to help brainstorm about who could be the next head of the Santa Clara, Calif., company's fledgling China subsidiary. "Don't forget I could be a candidate," Jones, then chief credit officer, recalled saying. "It just sort of jumped out of my mouth."

Seven years later, the mild-mannered Oklahoma native sits atop one of most ambitious efforts by an American bank to cash in on the rapid evolution of the world's second-largest economy.

That he's doing it at a time of intense trade tension between the United States and China has made Jones philosophical about SVB's dual identity.

"There might be people in the U.S. who ask why an American bank is helping Chinese startups," said Jones, the president of SVB Asia and the head of its Shanghai-based China operations.

"I've grown to understand that each country has its own experiences and perspectives," he said. "Sometimes the views are different, but that doesn't mean either side is wrong. They're just different."

What the two countries share, he added, is a desire to expand their economies. "I would say that good economic activity for both countries is in the best interests of everyone, in the best interests of world peace."

SVB Financial, the parent company of the $60 billion-asset Silicon Valley Bank, specializes in serving the "innovation economy" — early-stage growth companies, many with venture-capital funding, that require creative loan underwriting and some hand-holding.

It's a profitable niche and SVB has a stranglehold on it — both in the States and in places like London and Tel Aviv.

China, with its entrepreneurial fervor, surging venture-capital volume and a massive population that's willing — eager, in fact — to embrace new technology, is a natural fit.

"It's an exciting part of SVB's growth story," said Aaron James Deer, an analyst who follows the company for Sandler O'Neill. SVB has about $4 billion in international loans and $11 billion in deposits — most of those from Asia.

"International is becoming a bigger piece of the pie for SVB," Deer said. "China, by virtue of being the largest venture market outside of the U.S., is likely to be the biggest chunk of that."

Hotbed for startups

The Middle Kingdom has emerged as a hotbed for startups in the sharing economy, artificial intelligence, e-commerce and mobile payments spaces, among others.

In 2018, it attracted $105 billion in venture capital investments — second only to the U.S. at $111 billion, according to Preqin, a London research firm. The figure is up enormously from $5.6 billion in 2010

At year-end, the country boasted 88 technology "unicorns" — privately held startups valued at more than $1 billion — according to the Evergrande Research Institute in China. That also was second only to the U.S.

"An innovation company in China can grow two to five times faster than in the U.S.," said Becker, the SVB CEO, in explaining why the market appeals to his company. "There are more people, and they're embracing technology at an incredibly fast pace. If you find the right company with the right idea, the growth can be amazing."

SVB approaches China in two distinct ways. Wholly owned operations in Beijing, Shenzhen and Shanghai advise and help local startups manage overseas funding and relationships. Those operations are "hugely profitable," Jones said, but foreign banks like SVB face stiff limitations.

The franchise's domestic growth engine is a separate 50-50 joint-venture with Shanghai Pudong Development Bank — known as SPD Silicon Valley Bank, or SSVB — that operates much like SVB does elsewhere.

The $2 billion-asset SSVB turns a modest profit, most of which is plowed back into the operation to build for the long term. "We are a Chinese bank that is trying to replicate the SVB model with SVB's support," Jones, who runs both of the China-based operations, said of the joint venture. "The language is different, but the essence of what startup clients need here isn't all that different from in the U.S."

Awkward timing

This doesn't look like the greatest time for American banks to be expanding in China. President Trump's festering trade dispute with Beijing has sparked more questions than answers about the future of relations between the world's two largest economies.

Both sides have slapped tariffs on the other nation's products, threatening a global economic slowdown.

Concessions on both sides — in September, Trump agreed to temporarily delay tariffs on $250 billion in Chinese goods in response to China's cancellation of plans to increase tariffs on U.S. soybeans and pork — provided hope that an agreement could be worked out. The situation has remained fluid since then.

Few expect a comprehensive trade agreement anytime soon, and Trump himself has warned that the dispute might not be resolved before the 2020 elections.

The uncertainty and risk of further damage is unnerving for all sorts of businesses, including American banks. "Everybody feels like it's going to be a while before anything gets resolved," Jafar Amin, Hong Kong-based regional president for Wells Fargo Asia-Pacific, said in an interview this summer.

Bankers with multinational clients engaged in cross-border business say they are seeing a slowdown in areas as diverse as trade finance, foreign corporate investments and cross-border M&A activity.

The trade dispute "has caused some corporate clients to rethink their supply chains," said Christine Lam, China CEO for Citigroup, which has had a presence in Shanghai since 1902. "Some have been holding back on investments to wait and see how things play out before they plow money into a new plant."

Even so, U.S. banks, ranging from Citigroup, Wells Fargo and JPMorgan Chase to smaller players like the $43 billion-asset East West Bank in Pasadena, Calif., are pushing expansion plans here, judging that the potential rewards outweigh the risks.

"The Chinese banking market is still considered very much virgin territory from a foreign participation perspective," Lam said in her office high atop Citigroup Tower in Shanghai's futuristic Pudong business district. "There are a lot of opportunities."

U.S. banks here play to their global strengths. Wells Fargo, a retail powerhouse at home, is known better internationally for trade finance, commercial-dollar clearing and assisting financial institutions. It has branches in Shanghai and Beijing, but doesn't lend to domestic Chinese companies.

"We don't work with Chinese small businesses or commercial clients," Amin said. "Everything is linked back to our U.S. dollar capabilities and supporting U.S. clients and Chinese financial institutions by supplying dollar clearing and financing."

JPMorgan, a global capital-markets player, in March received Chinese regulatory approval for its own majority-owned and majority-controlled securities operation. The company projects that Chinese debt and equity issuances will grow to $120 trillion by 2030 from $20 trillion today.

Citi supports global multinationals doing business here, but Lam said the real opportunity lies in capitalizing on a domestic market with 1.4 billion people.

"Most of our clients are here because of the size of the China market," Lam said of the multinational segment. "They manufacture here to sell here, so trade war talk doesn't hurt them."

A powerhouse global consumer bank, Citi also has nearly 1 million Chinese retail customers — mostly affluent ones drawn to the brand.

Citi's consumer bank earnings in China grew 26% in 2018, according to Darren Buckley, who heads the unit.

"We have the potential to scale and grow our business in China at a transformational pace," Buckley said.

The question is, "are we comfortable as an organization with the amount of growth we could put on?" he added. "If we really opened up the full potential of China, it could become a disproportionate part of our global franchise."

SVB's role

For SVB, the Chinese government's eagerness to spur innovation, combined with an entrepreneurial culture, represents no less profound of a growth opportunity.

As it does elsewhere, SVB positions itself as a wizened hand that's been there and done that in the venture space.

It's comfortable lending on potential, not collateral, and boasts the in-house expertise to help clients navigate the world of venture capitalists and technology. "Everything around these companies is unsettled. That makes working with someone who is patient and has done this before extremely valuable," Jones said.

SVB counts roughly 2,200 clients between its two Chinese operations — some of them unicorns. Among them are household names in China, such as Mobike, a bike-sharing firm, and SenseTime, a maker of facial recognition technology.

Zhaogang, an e-commerce firm that operates a platform linking Chinese steel mills with thousands of steel wholesalers in China and eight other markets in Asia and Africa, got its start with the help of SVB in 2012 and became a unicorn five years later.

"An innovation company in China can grow two to five times faster than in the U.S.," says SVB Financial CEO Greg Becker.

Zhaogang's offices, occupying several floors of a midlevel high-rise not far from SVB's Shanghai headquarters, have the look and feel of a startup anywhere.

The lobby features a computerized map that highlights the firm's busiest markets and updated steel prices in real time. Behind the scenes, groups of young people cluster around computer workstations, bantering as they punch their keyboards.

Zhaogang has gone through six rounds of venture funding, counting such big-name global VC firms as Sequoia Capital and Matrix Partners among its shareholders.

One of those shareholders introduced Zhaogang to SVB, said Ran Chen, Zhaogang's financial markets director. Today the relationship is part lending, part advice on topics such as expanding overseas, adding new products and moving money in and out of the country.

"They helped us to be pioneers," Chen said. "A lot of Chinese banks try to mimic their model, but they can't because the mindset is so different."

An 'amazing opportunity'

Much of the credit for SVB's success goes to Jones, a self-described introvert who can't speak the local language but has effectively transferred SVB's way of doing business to Shanghai as only a risk-minded former credit chief can.

Jones tries to take personal advantage of the posting, informally studying Confucius and his philosophy and visiting historical sites. But he's a workaholic at heart, and running what he calls a "startup bank" in a dynamic market is most rewarding.

"To be able to lead a startup when we work all day long with clients that are startups is an amazing opportunity," said Jones, sitting in his 21st-floor office in Shanghai's bustling Huangpu district, a prosperous area of high-rise residential and commercial buildings just north of downtown.

Jones' responsibilities here extend beyond running two banks. SVB's business model is unique — it includes occasionally taking equity warrants in its client companies as a risk-management tool — and government regulators (and some bankers) have been keen on taking notes.

They have sought Jones' advice and cited SVB in official documents.

"China is very proud of its economy, but also understands that for it to remain the second-largest economy in the world — and to have any chance at becoming No. 1 — it's going to need a strong innovation environment," Jones said. "We are helping with that."

His efforts to educate regulators on SVB's underwriting and risk-management practices are helping modernize local banking regulations and practices around the startup space.

They've also won SVB praise in Shanghai, where last year Jones received a coveted Magnolia Award, given to foreigners who have made life better in this bustling city of 27 million.

"It's recognition more for the company than me," Jones said. "Innovation is very important to China."

Model bank

Could sharing the secrets of its business model come back to bite SVB? The Chinese are known for borrowing (or even stealing) intellectual property from Western partners in exchange for market access. Those partners sometimes emerge later as competitors.

Jones said SVB has "willingly accepted the expectation of becoming a model bank for China."

He doesn't feel that he's giving away any trade secrets in the process.

"Even if I was smart enough to teach potentially competitive banks the science of what we do, I don't think the art of our business is easily transferred," he said. "It is our ability to absorb the constant pace of innovation and assimilate it in our business that may be our core intellectual property."

While SVB's success has spawned Chinese imitators, most struggle to get things right. Some feel tempted, for example, to view the warrants that SVB includes in lending agreements as a profit center, not a risk management tool.

"I've seen bankers get greedy," and ask for up to 10 times the warrants SVB typically accepts, Jones said. "You have to wonder what kind of risk the bank is taking to justify getting such a big warrant."

"We have the potential to scale and grow our business in China at a transformational pace," says Citi's Darren Buckley.

More common are those that don't bring the necessary commitment or flair to the task.

"Every bank in China will try to compete with us, but they'll do it with the same product offering that they would offer to a steel mill," Jones said.

"We don't take real estate as collateral and most of our clients are not profitable," he added. "Other banks aren't comfortable with that, but we are."

Asked if he dreamed of running a model Chinese bank when he was growing up in Tulsa, Jones laughs. He didn't even leave the U.S. until he was in his 40s.

Jones' first bank, First National Bank & Trust in Oklahoma City, failed in 1986, its remains acquired by the old First Interstate. His regional boss, John Dean, went on to become SVB's CEO in the 1990s, and eventually recruited Jones, then the chief credit officer for Wells Fargo in Oregon, to the same post for SVB.

It was a new world for Jones, who had an aversion to technology lending in his previous jobs. But he was a quick study, and got credit for helping to keep the bank out of serious trouble through the bursting of the internet bubble and the Great Recession.

The experience has proved valuable in his current gig, providing important credibility with Chinese officials.

SVB's evolution in China

SVB began doing business in China in the early 2000s and significantly increased its commitment in 2011, after intense internal exploration that included a weeklong board meeting in Shanghai.

Among the questions: Would SVB's business model fly in a market that had vexed so many foreign banks? Did it need a local partner? Was the board comfortable with potentially writing off the expected $80 million investment if things didn't work out?

The board ultimately decided to jump in. "At the end, it was ... we really don't have a choice but to do this" because of China's importance to the global innovation economy, Becker recalled in a 2015 case study published by Stanford University.

The initiative was regarded as such a priority that then-CEO Ken Wilcox agreed to hand over SVB's reins to Becker and serve as president of the Chinese operations — a move that provided instant credibility in the eyes of government officials.

Jones arrived in 2012, just as the joint venture bank was getting off the ground — his willingness to move surprising friends who noted Jones' lack of international experience and reputation as a "finicky" eater.

"If you lined up 100 people at SVB and asked which one would be interested in moving to China, Dave would be picked last," Becker said. "But if you thought about what we were looking for over there — someone you can trust who sees the big picture — he was a great fit."

Today, Jones maintains a busy schedule. He is front and center as SVB's figurehead and pitchman, appearing in online videos and attending elaborate, family-style dinners with clients. At a recent client dinner, "we had 10 people around the table, a Lazy Susan rotating in the middle, and you just grab things [with chopsticks] as they go by," he said.

It's a cultural adventure, to be sure. A Becker visit to Shenzhen last spring included an audience with the local Party secretary — the city's highest-ranking official. "We went into a room the size of a small ballroom, and it had two chairs at the head of the room, for Greg and the Party secretary," Jones recalled. "You have to get used to the formalities."

Jones said he is taking Mandarin lessons, but doesn't feel comfortable enough to have business discussions in Chinese. Like many non-native speakers, he occasionally gets flustered by the language's tones. Depending on the tone, "ma" can mean mother, horse or marijuana. "You don't want to make a mistake," he said.

But it doesn't seem to matter much, because he's fluent in the language of banking and has proved adept at transmitting SVB's model and mentality to the Middle Kingdom.

As the Trump administration's high-profile flip-flop earlier this year on whether to allow U.S. chipmakers to sell semiconductors to Huawei, the Chinese technology giant, played out, Jones spied opportunity. Huawei is reliant on high-quality foreign chips for its products.

"While the trade war may have an effect on the broader economy, it won't necessarily be bad for innovation," Jones told his team. "If there's an absence of foreign semiconductor chips, domestic innovators will fill the gap.

"We work with the entrepreneurs and VCs that build those businesses," he added. "It's an opportunity for us."

The initial plan called for Jones to spend two or three years in Shanghai. "But he's been there now for more than six years," Becker said. "He's built the culture, built the business, etc. ... He's delivered everything I hoped for."

Jones has found an oddly comfortable niche in Shanghai — a capstone to a unique and rewarding growth journey for man and institution alike. "It's going to be hard to go back," he said.

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